Public Issue Through Prospectus: Meaning, Importance & Developments

Meaning and Details

A public issue through prospectus is one of the primary methods companies
use to raise capital from the public by offering their shares or debentures.
In this method, a company invites the general public to subscribe to its
securities by issuing a prospectus — a legal document that provides all
necessary information about the company, its financials, management, risks,
and the purpose of the issue.
This route is governed under the Companies Act, 2013, and regulated by the
Securities and Exchange Board of India (SEBI).
There are three main types of public issues:
 Initial Public Offering (IPO) – When a company issues shares to the
public for the first time.
 Follow-on Public Offer (FPO) – When an already listed company issues
additional shares.
 Offer for Sale (OFS) – Where existing shareholders sell their shares to
the public.
Importance
1. Capital Formation: It helps companies raise large amounts of capital to
fund expansion, new projects, or reduce debt.
2. Transparency: A detailed prospectus ensures that investors have access
to essential information, promoting transparency and informed decision-
making.
3. Wider Ownership: It helps in spreading ownership among a large group
of investors, including retail investors.
4. Improves Market Image: Listing on stock exchanges through a public
issue enhances the company’s brand value and credibility.
5. Economic Growth: Public issues contribute to the development of
capital markets and overall economic development.
Latest Developments in India (as of 2024–2025)
 SEBI’s Tightened Disclosure Norms: In 2023–24, SEBI strengthened
rules for IPO-bound companies to disclose more details about their
 operations, risk factors, and financials to protect investors and reduce
information asymmetry.
 Increased Retail Participation: With the growth of fintech platforms and
simplified KYC processes, retail investor participation in IPOs has surged.
 GREEN Shoe Option & Price Band Norms: More companies are using the
greenshoe option to stabilize post-listing prices, while SEBI is
encouraging tighter price bands to avoid excessive speculation.
 Sustainability Disclosures: Companies are now being nudged to include
ESG (Environmental, Social, Governance) disclosures in their
prospectuses.
Examples
 LIC IPO (2022): The Life Insurance Corporation of India launched the
biggest ever IPO in India worth ₹21,000 crore through a public issue. It
attracted widespread public interest and significantly boosted retail and
policyholder participation.
 Zomato IPO (2021): A landmark IPO in the Indian startup space,
Zomato’s public issue raised ₹9,375 crore, marking a shift towards new-
age tech companies entering the stock market.
 Tata Technologies IPO (2023): A major highlight of 2023, this IPO
marked Tata Group’s return to public markets after nearly two decades
and was heavily oversubscribed.
Green Shoe Option: Meaning, Examples & Cases
Meaning
 The Green Shoe Option, also known as an over-allotment option, is a
legal tool used during an Initial Public Offering (IPO) to stabilize the
stock price after it is listed on the stock exchange.
 It allows the underwriters (usually investment banks managing the IPO)
to sell more shares than originally planned — typically up to 15% extra
— if the demand is high.
 It is called the "Green Shoe" option because it was first used by the
Green Shoe Manufacturing Company (now Stride Rite) in the U.S.
Purpose:
 To manage post-IPO volatility.
 To support the share price in case it falls below the issue price.
 To provide confidence to investors.
How It Works (Example):
 Suppose a company is issuing 1 crore shares in an IPO, and underwriters
are allowed a green shoe option of 15% — i.e., 15 lakh extra shares.
Scenario A – High Demand:
 If the share price goes up post-listing, underwriters may exercise the
green shoe option and sell the extra 15 lakh shares at the higher price,
profiting from the demand.
Scenario B – Price Falls:
 If the share price falls below the issue price, underwriters buy back
shares from the open market (up to 15 lakh shares), creating demand
and stabilizing the price.
Real-World Examples & Cases (India)
 LIC IPO (2022)
India’s largest IPO used a green shoe option to help stabilize prices during a
volatile market phase.
The stabilizing agent (Kotak Mahindra Capital) exercised the option to
support the stock which dipped slightly after listing.
Tata Technologies IPO (2023)
 This IPO included a green shoe option, which helped maintain price
stability during listing.
 Given the oversubscription and massive demand, the green shoe
mechanism added investor confidence.
Key Benefits
 Protects retail investors from sharp post-listing price drops.
 Helps underwriters manage market perception and smooth trading.
 Creates a more efficient price discovery mechanism.
Conclusion
 The green shoe option is a strategic financial tool that plays a crucial
role in IPO pricing and investor sentiment.
 While not mandatory, it is widely recommended for companies seeking
a stable and successful market debut.
Employee Stock Option Plan (ESOP): Meaning, Importance & Examples
Meaning
 An Employee Stock Option Plan (ESOP) is a benefit plan offered by a
company that gives its employees the right to purchase a certain
number of shares of the company at a pre-determined price after a
specified period (known as the vesting period).
 These options are not actual shares when granted — they become
exercisable after the employee meets certain conditions like time spent
in the company or performance milestones.
Importance of ESOPs
 Employee Retention and Motivation- ESOPs encourage employees to
stay longer with the company (due to vesting conditions) and align their
interests with that of the company’s growth.
 Wealth Creation- Especially in startups and tech firms, ESOPs can
become a wealth-building tool for employees when the company’s
value increases (e.g., after an IPO).
 Performance Incentive- Employees are more likely to go the extra mile
when they know they’re part owners of the company.
 Attracting Top Talent- For startups and companies with limited cash
flow, offering ESOPs is a strategic way to attract and retain skilled
professionals without high upfront salaries.
 Tax Benefits (under certain conditions)- Employees may enjoy deferred
taxation, and companies may receive certain deductions under Indian
tax laws.
Recent Examples and Cases in India
1. Zepto (2023)
 The quick-commerce startup Zepto announced a $20 million ESOP
buyback, allowing early employees to liquidate their stock options.
 This showed growing maturity in Indian startups, offering early exits to
employees.
2. Ola Electric (2024)- Ahead of its IPO, Ola Electric restructured its ESOP pool
and added more stock options for employees. It was seen as a way to reward
loyalty and increase morale before going public.
3. Swiggy (2023)
 Swiggy allowed an ESOP buyback worth ₹200 crore.
 The company said this move was to reward employees ahead of its
expected IPO and motivate them to stay.
4. PhonePe (2023)
 Flipkart spin-off PhonePe executed an ESOP buyback program worth
₹135 crore.
 It gave employees partial liquidity, showcasing how ESOPs can act as
real, tangible rewards.
Key Terms in ESOPs
 Grant Date: Date on which ESOPs are offered.
 Vesting Period: Duration after which the employee can exercise the
options.
 Exercise Price: Price at which shares can be bought.
 Exercise Date: Date when the employee chooses to buy the shares.
 Cliff Period: Minimum period before any options vest (common in
startups).

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